Free cash flows or FCFF means that are residual after payment of all operational costs and capital expenditures. Free cash flows are different from accounting profit as it excludes the non-cash items (depreciation & amortization) that are incorporated in the income statement, and incorporates the costs of capital investments.
There are normally two types of free cash flows calculations, free cash flows to the firm (FCFF), and free cash flows to equity (FCFE). The FCFF is available to bondholders and shareholders whereas the FCFE are available to stockholders only.
The formulas for FCFF and FCFE are as follows:
FCFF = (EBITDA) * (1-t) + D*t - CAPEX – IWC
FCFE = (EBITDA) * (1-t) + D*t - CAPEX – IWC – Interest *(1-t) + Net Borrowings
Where,
EBITDA = Earnings before interest tax depreciation and amortization
t = Tax rate
CAPEX = Capital expenditure
IWC = Investment in working capital
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